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    Lesson Plan Ratio Analysis Financial Analysis

    Uploaded by

    Matthew Gonzales

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    © All Rights Reserved
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    Ratio Analysis Financial Analysis Finance Lesson Plan Performance Objective Students will understand the importance of financial ratios in assessing a company’s financial condition. Objectives * Discuss the use of different types of ratios in business * Calculate financial ratios * Graph financial ratios © Ratio a comparison of two amounts * Ratio analysis- calculating and interpreting financial ratios; a tool businesses use to identify possible problems as well as opportunities of a business Liquidity- measures how quickly assets can be converted to cash Efficiency measures how well assets and liabilities are managed Leverage- how much debt is used to finance an asset, Profitability- sales minus the costs associated with the goods or services sold Stock: share of ownership in a company Time When taught as written, this lesson should take approximately four to five days to teach. Preparation TEKS Correlations This lesson, as published, correlates to the following TEKS. Any changes/alterations to the activities may result in the elimination of any or all of the TEKS listed. 130.168 (c) Knowledge and Skills, (3) The student demonstrates mathematics knowledge and skills required to pursue the full range of postsecondary education and career opportunities. The student is expected to: (A) demonstrate knowledge of arithmetic operation such as addition, subtraction, multiplication, and division; (B) demonstrate use of relational expressions such as equal to, not equal to, greater than, less than; (C) apply data and measurements to solve a problem; and (F) analyze data when interpreting operational documents. Copyright © Texas Education Agency, 2014. All rights reserved. 1 Interdisciplinary Correlations English-English | * 110.31(b)(1) Reading/Vocabulary Development, Students understand new vocabulary and use it when reading and writing. * 110.3 (b)(11) Reading/Comprehension of informational text/procedural texts. Students understand how to glean and use information in procedural texts and documents. Math-Algebra | © 111.32 (b)(1)(C) Interpret and make decisions, predictions, and critical judgments from functional relationships. Social Studies-World Geography 113.34 (c}(20}(A) Describe the impact of new technologies, new markets, and revised perceptions of resources. Occupational Correlation (O*Net - www.onetonline.org/) Job Title: Accountants O*Net Number: 13-2011.01 Reported Job Titles: Business Analyst, Accounting Supervisor, Financial Reporting Accountant Tasks * Prepare, examine, or analyze accounting records, financial statements, or other financial reports to assess accuracy, completeness, and conformance to reporting and procedural standards. * Analyze business operations, trends, costs, revenues, financial commitments, and obligations, to project future revenues and expenses or to provide advice, * Report to management regarding the finances of establishment. Soft Skills: Mathematics, Complex Problem Solving, Critical Thinking Accommodations for Learning Differences It is important that lessons accommodate the needs of every learner. These lessons may be modified to accommodate your students with learning differences by referring to the files found on the Special Populations page of this website. Preparation * Review and familiarize yourself with the terminology and website links, * Have materials and websites ready prior to the start of the lesson, References * http://ro.uow.edu.au/commpapers- An Example of the Use of Financial Ratio Analysis: The Case of Motorola * Century 21 Accounting Advanced, South-Western Publishing, 2008. Copyright © Texas Education Agency, 2014. All rights reserved. 2 * South-Western Contemporary Mathematics: for Business and Consumers © https://secure.wvscpa.org/resources/public/56-takin_care_of_business_cpa_ipack * _https://takechargetoday.arizona.edu/lessonplans/financial-facts-feud Instructional Aids Textbook or Computer Program Lesson 1.01 Presentation © Instructor Computer/Projection Unit © Online Websites agrams/Charts Introduction The main purposes of this lesson are to help students understand the following concepts: + how to calculate financial ratios, + what financial ratios mean to a business, and + how some ratios relate to each other. Ask students, “if a company is making sales, is it also making a profit?” Ask students if they think that comparing a company’s ratios to a similar company is more or less accurate than comparing them to the industry itself Copyright © Texas Education Agency, 2014. All rights reserved. 3 Outline What is Ratio Analysis? ‘A. Ratio- a comparison of two numbers B, Ratio analysis- a tool businesses use to identify possible problems as well as opportunities Ill. What is liquidity and why is it important? A. Liquidity measures how quickly assets can be converted to cash Ask students if they know what a ratio is. Provide examples, such as males to females in a particular college, odds of winning the lottery, or a ‘comparison of a salary for two different occupations, Explain that ratios are a way to quantify the financial condition ofa business. We may see their products in stores, but how are they really doing? When introducing the concept of liquidity, ask students if they needed money to buy prom tickets; for example, how much cash on hand would they have (just fictitious amounts), or is it in savings account? Is there anything they can sell to get cash? Multiple Intelligences Guide t + (ia) - 2 | Milo | @ i nae | ae enariat | penal | muaoasoet| “Seat | yi | scare | naust | VotlLnmit | Vota Copyright © Texas Education Agency, 2014. All rights reserved. 4 B. Can determine how easily a company can meet its debt obligations Liquidity Ratios ‘A. Working Capital 1. Shows what is left after all liabilities are paid by the assets 2. Equals Current Assets — Current Liabilities B. Current Ratio 1. Shows the dollar value of assets for each dollar of liabilities 2. Equals Total Current Assets/Total Current Liabilities C. Quick Ratio 1. Determines the ability to meet short-term debt obligations 2. Equals (Total Current Assets — Inventories)/Total Current Liabilities What is Efficiency and why is it important? A. Efficiency- how well assets and liabilities are managed B. Focus is on management Place sticky flip chart paper on the walls around the room and assign a ratio to groups of two or three, depending on your class size, Have the groups conduct research on whether a higher or lower ratio is better. Once they find out, they can write the ratio name, what it means, the formula, and the words, “Higher” or “Lower.” Each group can take turns presenting their ratio to the class. No calculations are necessary yet. Show students a Balance Sheet for a company they select. Then, ‘on the document camera or board, show the students an example of which accounts are used for a ratio that you select. Calculate the ratio and explain if the ratio is favorable or otherwise, Then show them an Income Statement and have the students call out a ratio. Have a student come up to the board and demonstrate how to calculate the ratio. Multiple Intelligences Guide | Q Logical Kinesthetc a nen ie Copyright © Texas Education Agency, 2014. All rights reserved. 5 (Exstentaist [interpersonal [inrasersonal | Boa [ tathemaical | MusicalRhyinme | Najuraist | Verballinguisie | VsueiSpatal | Vi. 8 often inventory is sold; too high 2 ratio can lead to high storage costs What is Leverage and why sit important? A sed to finance an asset 8 the risk of bankruptcy if there is too much debt that cannot be repaid Total asset turnover handled 2. Equals Average Accounts Receivable/(Total Sales/365) Inventory ratios- tells how 1. Inventory turnover = cost of goods sold/average inventory 2. Average days to sell inventory = days in a year/inventory turnover 1. How much a dollar of assets generates in sales 2. Equals Sales/Average Total Assets Accounts Receivable Turnover 1. The average number of times accounts receivable is collected in a time period 2. Equals sales on Account/Average Receivables Leverage- how much debt is Can cause a company to run As you are going through the ratios, you can highlight the accounts that are used for each ratio. You can also locate financial statements for a popular, well-known company and, if you have a computer lab, have students view the same company's financial statements, or print them for the students to highlight the accounts. Show students how to locate financial statements from several sources. They can go directly to a company website and usually there will be a tab or a page saying “Investor Relations.” Students can also go to www.sec.gov, go to Filings, Company Filings Search, Full Text (on the left), Advanced Search Page (on the right), Under Forms, click on 10-K, and click on Company Name, then type in the name of the company. Click the link at the bottom for the 10-K. Look in the Table of Contents for Financial Statements. Multiple Intelligences Guide : + || @ 8 | fs | @ I tees | Copyright © Texas Education Agency, 2014. All rights reserved. 6 B m3 Vill. Leverage Ratios A. Debt to assets 1. Measures the degree of financing of assets 2. Equals Total Debt/Total Assets 8. Debt to equity 1. Measures the amount of debt financed by every dollar of equity; the higher the ratio the higher the risk to possible investors or creditors 2. Equals Total Debt/Total Equity IX. What is probability and why is it important? A. Profitability formula: sales minus the costs associated with the goods or services sold 8. Importance is that making a profit, is the most prominent goal of most businesses, X. Profitability Ratios A. Net profit margin 1. Measures how well the cost of goods sold is controlled as well as the operating accounts 2. Equals profit after taxes/Sales 8. Return on investment 1. Represents the amount of profit as it relates to the owner's investment Continue going through the ratios with students—having them respond to questions to check for their understanding. They can take turns in pairs coming up to a projector and pointing out how to make the calculations. Multiple Intelligences Guide Copyright © Texas Education Agency, 2014. All rights reserved. 7 T Exstontaist Interpersonal Q Logical a Kinasthater Intrapersonal | Bodiy | mainamatical | MusicalRhythmic nen Verbal Linguistic Visual'Spatial we atwaust 2. Equals Net Income/Owner’s Equity C. Return on equity 1. Measures % of profit earned ‘on the stockholder’s investment 2. Equals profit after taxes /stockholder’s Equity D. Return on assets 1. Measures the profit earned from the assets of the ‘company 2. Equals profit after taxes / Total Assets Xl, What are investor ratios and why are they important? A. Also referred to as ratios that affect stock B. Stockholders concerned about how well a company is performing C. Dividends paid from profits so stockholders are concerned with earnings XIL. Investor Ratios ‘A. Earnings per share 1. The amount of net income that belongs to one share of stock 2. Equals net Income / Outstanding Shares B. Price-earnings ratio 1. Measures the amount You can also create a Family Feud (called Financial Facts Feud) game for the students and divide the class into teams. An example question could b: What terms are associated with the Quick Ratio? The choices can include: Total Current Assets, Inventories, or Current Liabilities. If any guesses are made that are incorrect, the team gets a strike, Three strikes and the other team gets chance to answer. Follow this link to get a template: httosi//takechargetoday.arizona, edu/lessonplans/financial-facts- feud. Youneed to register for the website but itis free. Copyright © Texas Education Agency, 2014. 8 All rights reserved Multiple Intelligences Guide { | raat A 7 i lite.

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